Pearson v. Component Technology Corp., VIII-

• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)
• Citation: 247 F.3d 471
• Docket Number: No. 00-3056,INC,VIII-,00-3056
• Parties: (3rd Cir. 2001) THOMAS PEARSON; JOHN KOWALKOWSKI, ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED, APPELLANTS v. COMPONENT TECHNOLOGY CORPORATION A/K/A COMPTECH; GENERAL ELECTRIC CAPITAL CORPORATION; TIFD; THOMAS P. AGRESTI, ESQ.; KENNETH CHESTEK, TRUSTEES Argued:
• Decision Date: 24 October 2000

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247 F.3d 471 (3rd Cir. 2001) THOMAS PEARSON; JOHN KOWALKOWSKI, ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED, APPELLANTS
v.
COMPONENT TECHNOLOGY CORPORATION A/K/A COMPTECH; GENERAL ELECTRIC CAPITAL CORPORATION; TIFD VIII-R, INC.; THOMAS P. AGRESTI, ESQ.; KENNETH CHESTEK, TRUSTEES No. 00-3056 UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT Argued: October 24, 2000
Filed April 13, 2001

On Appeal From the United States District Court For the Western District of Pennsylvania (D.C. Civ. No. 94-CV-00293) District Judge: Honorable Maurice B. Cohill, Jr .

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Rolf L. Patberg, Esquire (argued) Patberg, Carmody & Ging 527 Court Place Pittsburgh, PA 15219 Richard E. Filippi, Esquire Filippi & Nies 303 French Street Erie, PA 16507 Counsel for Appellants

Richard A. Lanzillo, Esquire (argued) Know, McLaughlin, Gornall & Sennett, P.C. 120 West Tenth Street Erie, PA 16501 Counsel for Appellees GE Capital Corporation and Tifd VIII-R Inc.

Before: Becker, Chief Judge, Scirica and Fuentes, Circuit Judges.

OPINION OF THE COURT

Becker, Chief Judge.

The Worker Adjustment and Retraining Notification Act of 1988 (the WARN Act), 29 U.S.C. S 2101 et seq., mandates that employers provide workers with 60 days' notice (subject to certain exceptions not at issue in this appeal) prior to a plant closing or mass layoff, and allows various remedies for workers when closures are not preceded by the requisite notification. Because a plant closure often presages a

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corporation's demise, leaving workers with no source of satisfaction from their employer , plaintiffs have frequently sought damages from affiliated corporations. In a parallel series of cases, plaintiffs with claims arising from non-WARN Act sources of law against debt-laden or bankrupt corporations have occasionally attempted to sue the corporations' major secured lenders, on the theory that the lenders have exercised such control over the corporations that veil-piercing is appropriate. This case implicates both lines of precedent.

The question before us is whether the former employees of Component Technology (CompTech), a now-defunct company, have set forth sufficient evidence to create a genuine issue of material fact as to whether, under standards we must fashion for this Circuit, CompTech's major secured lender, General Electric Capital Corporation (GECC), should incur WARN Act liability for CompTech's unnoticed plant closure. This question, in turn, requires us to consider not only the prerequisites for parent/subsidiary liability in the WARN Act context (as will be shown, that jurisprudence is apposite here), but also whether the prerequisites change in the context of lender/borrower relationships.

The Department of Labor (DOL) has issued a regulation setting forth relevant factors for courts to use when considering whether to impose WARN Act liability on a parent corporation. See 20 C.F.R. S 639.3(a)(2). These factors closely resemble, but do not precisely mirror, the "single employer" or "integrated enterprise" test, frequently utilized for similar purposes in labor and employment law. The Department has also issued a statement explaining its intention that jurisprudence under the WARN Act not deviate from "existing law" with regard to liability for affiliated corporations. See 54 Fed. Reg. 16,045 (Apr. 20, 1989). The tension between "existing law" and the regulatory factors has led to considerable confusion among courts as to the appropriate standards to apply for WARN Act veil-piercing. Compare United Paperworkers Int'l Union v. Alden Corrugated Container Corp., 901 F . Supp. 426, 436-39 (D. Mass. 1995), with Wholesale & Retail Food Distrib. Local 63 v. Santa Fe Terminal Servs., Inc., 826 F. Supp. 326, 334-35 (C.D. Cal. 1993). To further compound the problem, when it comes to lenders rather than parents in other areas of law, courts have been extremely reluctant to hold lenders liable for their borrowers' actions; usually, some version of the "alter ego" or "instrumentality" test for liability is used, often with an especial vigor. These tests are far less hospitable to plaintiffs than labor law's "integrated enterprise" test, and, apparently, than the Department of Labor factors. Thus, the law is presently unsettled as to the proper test for liability under the WARN Act, and as to the significance for WARN Act purposes of an affiliated corporation's status as "lender" or "parent."

In this case, GECC loaned large sums of money to CompTech, and CompTech fell into default. Exercising its rights under the loan agreements, GECC voted CompTech's stock and installed a new slate of directors and a new Chief Executive Officer, to whom title of the stock was transferred. For the next few years, GECC and CompTech maintained a close relationship as CompTech struggled to survive as a going concern; when CompTech finally was unable to turn a profit, GECC declined to provide further cash infusions. CompTech, unable to secure new financing, collapsed and shut down its operations without giving WARN Act notice. A class of former CompTech employees have now brought suit against GECC under the WARN Act.

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We conclude that the appropriate test to employ under the WARN Act for affiliated corporate liability is the multi- factored test promulgated by the DOL. We believe that the DOL's instruction that courts apply "existing law" to questions involving intercorporate liability was not intended to undermine the force of its own regulation on the subject, but was instead intended to instruct courts that existing precedent applying other tests (such as the "integrated enterprise" test) may be useful and appropriate to resolve analogous questions arising under the WARN Act. We also observe that the regulation indicates that the listed factors are not an exhaustive list, which we interpret as a reminder that the test is one of balancing, and that, as with any balancing test, a number of circumstances not specifically enumerated may be relevant.

We must also determine whether GECC's initial status as a secured lender affects the test we choose to employ for WARN Act liability, and we must further decide whether, under the appropriate test, the District Court erred in concluding that plaintiffs had not put forth sufficient evidence to create a genuine issue of material fact as to GECC's liability. We ultimately hold that because the lines separating "parents" from "lenders" are not often bright ones, the simpler approach is to apply the same test for liability regardless of the formal label the corporations have attached to their association. Our conclusion is strengthened by our recognition that deter mining liability by reference to whether a lender has behaved in a "typical" manner, as did the District Court in this case, carries with it the risk of unintentionally altering what is "typical," as lenders structure their relationships with borrowers to respond to the practices that we ourselves have proclaimed "typical." Therefore, we take a more functional approach to determining whether or not to "pierce the veil" under WARN by focusing on the nature and degree of control possessed by one corporation over another; in so doing, however, particular weight must be accorded, where applicable, to a lack of ownership interest between corporations.

Applying the DOL factors to the circumstances presented in this case, we hold that even if GECC did, in the course of its relationship with CompTech, technically become a "parent" corporation, its actions never reached the point where even a more conventional parent would become liable. Therefore, the District Court's grant of summary judgment to GECC was proper, and we will affirm the judgment.

I. Facts and Procedural History

Component Technology, a Delaware corporation with headquarters in Erie, Pennsylvania, was a custom injection molder whose business was to manufacture plastic objects in accordance with corporate customers' specifications, principally in the business machine and medical products markets. R&R Plastics (R&R) was, at that time, a wholly-owned subsidiary of CompTech.

In June 1989, CompTech was poised to enter into a profitable new arrangement with Kodak, whereby CompTech would manufacture plastic components for a revolutionary new photocopier. In anticipation of the capital expansion that the venture would require, CompTech sought and obtained a $25,000,000 loan from GECC. The loan was formally structured as a loan to the Chicago Plastics Products Corporation (Chicago Plastics), a holding company formed for the purpose of acquiring CompTech. As security for its loan, GECC received pledge agreements for all of the stock in Chicago Plastics, CompTech, and R&R, including the right to vote the stock in the event of a default.

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Shortly after Chicago Plastics purchased CompTech, the Kodak project was canceled due to "technical obsolescence." CompTech's business immediately faltered, resulting in default on the GECC loan in 1991. GECC exercised its rights under the pledge agreements and voted its stock to install new boards of directors of the three corporations. The new directors, in turn, chose new corporate officers. On July 10, 1991 GECC hired a consultant with experience in the plastics industry, Thomas Gaffney, to serve as Chief Executive Officer of Chicago Plastics, CompTech, and R&R.

At some point in late 1991 or early 1992, GECC V ice- President Jeanette Chen began to manage the CompTech account. In March, she drafted an internal credit memorandum outlining a proposed strategy to restructure CompTech's loans. The memo explained that for GECC to "[m]aximize debt recovery" it would need to "hold[ ] investment for sufficient time period to implement merger/acquisition strategy, rebuild customer base, and...